Making Open Strategic Autonomy work - European Trade in a Geopolitical World
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Making Open Strategic Autonomy work – European Trade in a Geopolitical World
Table of Contents Foreword3 Introduction5 Executive summary 6 Global value chains that meet Europe’s needs 9 New opportunities from the Transatlantic alliance 23 Finding a positive way forward in the China relationship 35 Annex: Tracking progress on trade 47
Foreword
Since 1945, liberal democracy combined with an open market economy has
proved to be a successful way to organise society. Through free trade and
the invisible hand of the market, social benefits and public goods have been
delivered widely and globally to an increasing part of the population.
Globalisation has been the force that wove came out as the most disruptive risk, two-
economies together, emboldened by the parallel thirds of the ERT Members stated that their
advance of the internet and digital technologies. companies are adjusting their supply chains
Free trade and open markets have been tested on either a temporary or permanent basis,
at several moments: the 1997 Asian financial to adapt to this changing environment.
crisis, the 9/11 events, and the 2008 global
financial crisis to name a few. And even though ERT firmly believes that businesses are
the market economy took a hit in the wake of the best placed to manage their own supply
2008 crisis, globalisation nevertheless remained chains. Diversification and flexibility driven
an important driver of business and industry. by industry itself would make supply chains
more resilient. Policies to enforce stockpiling
The recent COVID-19 pandemic has or reshoring are only justified in specific and
dramatically highlighted existing supply exceptional circumstances. This is especially
chain dependencies, such as Asia being the important now, as the green and digital
biggest source of basic personal protective transitions are an intercontinental race the
equipment. Despite the challenges, companies EU is running in a spirit of both partnership
adjusted strategies quite swiftly and global and competition. Being successful in this
supply chains broadly demonstrated a high race requires that European industry be as
degree of resilience. Globalisation showed once adaptive and competitive as possible.
again that it can adapt to external shocks.
Our aim with this publication is to provide
The consequences of the pandemic have
analysis that communicates the outlook and
prompted analysis and debate on how
ambitions of the leaders of some of Europe’s
globalisation can be improved. The scarcity of
biggest global companies on this vital
certain commodities and raw materials is now
topic of international trade. It is comprised
playing out in the markets. The recent gridlock
of three sections that underpin European
in the Suez Canal provides another reminder of
trade: Global value chains and resilience;
vulnerabilities in global supply chains. Therefore,
Transatlantic relations; and the EU-China
it is no surprise that conversations about
relationship. Each of these sections provides
reshoring are gaining momentum and volume.
recommendations which could hopefully
Nevertheless, faith in the resilience of supply guide and inform the current debate on the
chains and globalisation remains strong most pressing trade issues of our time.
among business leaders. In the most recent
edition of The Conference Board’s semi- Jacob Wallenberg
annual surveys of the CEO’s & Chairs in ERT, Chair, Investor AB
while shortage of supplies and trade tensions Chair, ERT Committee on Trade & Market Access
3
Making Open Strategic Autonomy work – European Trade in a Geopolitical World
Introduction
The geopolitical, economic and social context for European trade policy is
changing rapidly. Emerging new technologies present us with great opportunities,
as do the green and digital transitions. But European industry also faces the
twin challenges of competing globally on a playing field that is increasingly
uneven and in an environment that risks becoming hostile to globalisation.
The way in which we navigate through this This report does not attempt to cover all
uncertain environment will be critical, not only aspects of Europe’s trade or industrial policies,
for European jobs and growth in the industries but only those that are directly relevant to the
of tomorrow, but for Europe’s ability to act themes described above. More detail on the
independently and to exert influence globally. ERT’s views on trade policy can be found in the
Expert Paper on the EU’s trade policy review
This report assesses these challenges and which ERT published in November 2020.1
identifies the priorities for policymakers
if we are to rise to meet them. As in all areas of policy, successful
implementation is essential, and it is outcomes
It does so through the prism of three
that ultimately matter most. For that reason,
developments of global significance which
in an annex to this report, we also set out
are now recasting the realms of the possible
ideas for how progress on European trade
and the desirable for trade policy – the
policy should be assessed. This draws on
pandemic and the stresses placed on global
ERT’s proposal from November 2020 for a
supply chains, political changes in the US,
balanced scorecard of indicators to track the
and tensions in the EU-China relationship.
performance of the EU’s industrial strategy. 2
Throughout this report, our recommendations
are intended to help policymakers as they
work with industry to find new opportunities
by levelling the playing field, by bolstering
globalisation, and by addressing the genuine
concerns that many people have about
some of globalisation’s consequences.
1 ERT Expert Paper on “The EU’s trade policy review”, November 2020
https://ert.eu/wp-content/uploads/2021/01/ERT-Expert-Paper-the-EUs-Trade-Policy-Review_Nov2020.pdf
2 ERT Paper on “Putting the EU Industrial Strategy into action”, November 2020
https://ert.eu/wp-content/uploads/2020/11/ERT-Publication-Putting-the-EU-Industrial-Strategy-into-action_Nov-2020.pdf
5
ERT Trade Report 2021
Executive Summary
Being open to trade is a source of strength, not weakness. It allows the EU to
build, expand and preserve the strong global value chains that are essential
for competitiveness, and growth. It allows diversification and flexibility in
supply chains, making them more resilient. And it creates mutual dependencies
that encourage international cooperation between the major economies.
The EU’s trade and industrial policies should Innovation helps to strengthen value chains
seek to strengthen the global value chains of and the EU should seek a better enabling
European firms by increasing openness, building environment for innovation through
capabilities, and ensuring a level playing field stronger protection of intellectual property
for competition, both in Europe and globally. internationally. The incentives created by
IP rights have for example also contributed
Global value chains that to the rapid development of vaccines.
meet Europe’s needs
To improve resilience, it is essential that
Resilience begins at home and so the EU the EU invests in developing strategic
should further strengthen the Single Market trade and investment relationships with
to support diversification and flexibility in like-minded partners, including the
supply chains. This means removing regulatory US. The EU also needs a comprehensive
frictions that restrict intra-EU trade and make economic and regulatory diplomacy strategy
it harder to source flexibly. As part of this, the to help enhance supply chain flexibility.
EU should reinvigorate the Single Market
standardisation process in close cooperation In its trade policy, the EU should promote
with industry and standardisation bodies. internationally agreed rules and standards
for international investment protection, to
To ensure that supply chains are resilient prevent companies from suffering from unfair
the EU needs a clear definition of critical practices or discrimination by the host state.
goods and a precise approach to applying
the concept of open strategic autonomy. New opportunities from the
Critical goods should mean those for which transatlantic alliance
supply disruptions could potentially undermine
the ability of policymakers to meet core The EU and US acting together can build
public policy objectives – such as national a stronger transatlantic economy, shape
security, public health, and fair competition standards globally based on transparency
– and which would, consequently, materially and our shared values, and strengthen
impact the lives of European citizens. multilateral institutions and the rules-based
system. The new EU-US Trade and Technology
Businesses are best placed to manage Council will provide a dedicated platform for
their own supply chains. Targeted cooperation on trade policy and related areas.
interventions to support the resilience of
supply chains for critical goods should be This platform should have a broad agenda that
the exception, not the rule. As such, the includes regulatory cooperation. Some of the
default setting for the policy of open strategic most promising areas for collaboration are in
autonomy should be openness. The EU should new technologies, both to build transatlantic
encourage international diversification to capabilities and to set standards internationally.
support this. Policies to encourage inventory The priorities include artificial intelligence,
accumulation or reshoring are only justified IoT, platforms, 5G, and cybersecurity.
in specific, exceptional circumstances.
6
Making Open Strategic Autonomy work – European Trade in a Geopolitical World
Businesses are best
placed to manage
their own supply
chains. The default
The EU and US should To support this, the EU
aim to build a common
setting for the policy should establish a dedicated
transatlantic digital of open strategic China unit in the European
economy. As part of this, autonomy should be Commission to bring
they should work together urgency and coherence to
and with others to enhance
openness the management of the
the free, cross border flow of relationship. The new unit
data. As a matter of urgency, they should agree should engage with industry on China policy.
a new transatlantic framework for data transfer. There should always be a business element to
EU-China negotiations and summits as well.
To level the playing field for business globally,
the EU and US should work together on a The EU must address barriers to market access
package of WTO reforms. They should identify in China, including non-tariff barriers such as
and counter unfair trade practices used by non- discriminatory licensing, further reductions in the
market economies. And they should drive efforts negative list for investment, encouraging China
to level up ESG standards globally, working to join the WTO’s Agreement on Government
through multilateral bodies where possible. Procurement, and protections for IP.
In this and other areas, the EU and US should The EU must also equip itself with the right
enter dialogue with business on priorities. tools to challenge unfair competition from
ERT and our US counterpart the Business China. This includes making full use of existing
Roundtable (BRT) offer our full support. tools such as antidumping and countervailing
duties, while adopting the proposed new
To establish momentum, the EU and US instrument to level the playing field with
require early successes that resonate foreign firms that benefit from subsidies.
with citizens. The trade dimension to
COP26 provides an immediate opportunity, The EU and China should address concerns
where the priority should be to encourage about the Comprehensive Agreement
the wider adoption of carbon pricing and on Investment, including the scope and
a common approach to carbon leakage. enforceability of labour and environmental
commitments. They should ratify the agreement
Finding a positive way forward when the political conditions allow as this will
in the China relationship bring immediate commercial opportunities
The EU-China economic relationship is and help to rebalance the relationship.
critically important for European industry, Trade policy is an important tool for realising
jobs, and growth. It is also one of the most European climate ambitions and achieving
complex and challenging relationships. climate neutrality by 2050. The EU’s dialogue
It is essential that European policymakers with other stakeholders, including China
and political leaders face up to the and the US, should identify opportunities
challenges, while remaining focused on for cutting emissions while building a more
Europe’s long-run interests. That means sustainable, competitive economy.
making steady but visible progress on the As a practical step towards this, an immediate
core task of rebalancing the economic priority for the EU and China should be
relationship, both through increasing access to collaborate to develop and promote
on fair terms for European firms in China and multilateral carbon accounting standards and
in ensuring that Chinese firms compete on share expertise on plans to cap emissions, on
fair terms in the Single Market and globally. emissions trading, and on green finance.
7Global value chains that
meet Europe’s needs
In a globally integrated economy, building strong global value chains3 is
essential for the competitiveness of European industry and for jobs and
growth in the European economy. Supply chain resilience is a critical
part of this. Resilience begins at home, in the European Union, with an
integrated and flexible Single Market. Being open to trade is a strength,
both because it allows diversification and flexibility and because it
creates mutual dependencies that encourage international cooperation.
The EU’s trade and industrial policies – along with the EU’s approach to
implementation of the concept of open strategic autonomy – should
seek to strengthen the global value chains of European firms by building
capabilities, supporting innovation, increasing openness, and ensuring
a level playing field for competition, both in Europe and globally.
3 In this report, we adopt the definitions used by the OECD for global value chains and supply chains. Accordingly, global value chains refer to
“the full range of firms’ activities, from the conception of a product to its end use and beyond… it includes activities such as design, production,
marketing, distribution and support to the final customer”. Global supply chains refer to a narrower range of activities, namely focused on the
operational process of producing and distributing a good or service, rather than the value-adding activities.ERT Trade Report 2021
Understanding supply chain resilience
In the wake of COVID-19, a consensus has Strategies to build resilience do not require a
emerged that the resilience of supply chains wholesale rethink of current models, which
needs to be strengthened, but differences have proven remarkably resilient throughout
remain over how this should be done. Supply the pandemic. European supply chains adapted
chains must be able to withstand and recover quickly as soon as they came under pressure
from external shocks of all kinds, ranging from and in many cases performed well during this
pandemics to cyber-attacks and to extreme historic ‘stress test’. When internal EU trade fell
climate events. Supply chains also need to be in March and April 2020 – as some countries put
resilient to isolated, unforeseen events, such up barriers to exports – the gap was quickly filled
as the blockage to the Suez Canal in March by global supply chains that drew in imports
2021, which disrupted international trade from outside of the EU. 5 It was openness to
estimated to be worth $10 billion per day.4 external trade that allowed the EU to meet the
surge in demand for many essential products.
Strategies to build resilience should not
focus on preparing for the last crisis or any The capacity to innovate also enabled
one specific threat, but on enabling supply European manufacturers to respond quickly
chains to adapt quickly to disruptions or to new challenges. Many companies completely
spikes in demand. We do not know what the reworked their manufacturing facilities to
next crisis will look like. While the COVID-19 produce ventilators and other vital equipment in
pandemic sparked a surge in demand for record time. At the height of the first wave of the
personal protective equipment, ventilators and pandemic, the number of European companies
vaccines, future crises may see a rapid increase in producing face masks increased from 12 to 500
demand for a different set of goods or services. in less than two months.6 This flexibility and
Given this uncertainty, policymakers should agility of European supply chains – enabled
work with industry to support versatility, to by the capacity of companies to innovate in
enable companies to manage agile and flexible response to new challenges – revealed itself
supply chains that are resilient in times of crisis. as a cornerstone of European resilience.
Extra-EU manufacturing imports grew at the start of the pandemic
EUR billion
Intra-EU imports Extra-EU imports
40
35
30
25
20
15
10
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Eurostat. Link: https://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do
4 Financial Times, March 2021 https://www.ft.com/content/7afcdae6-b116-424f-bd1c-08e6bbdf6b77
5 ECIPE Paper on “Covid-19 and the Danger of Self-sufficiency”, March 2021 https://ecipe.org/publications/covid-19-and-self-sufficiency/
6 ECIPE Paper on “Covid-19 and the Danger of Self-sufficiency”, March 2021 https://ecipe.org/publications/covid-19-and-self-sufficiency/
10Making Open Strategic Autonomy work – European Trade in a Geopolitical World
Extra-EU imports of COVID-19 products filled the gaps when intra-EU imports fell in 2020
EUR billion
Intra-EU imports Extra-EU imports
6
Some EU countries Shortages were filled
banned exports of by imports from
COVID-19 products outside the EU
5
4
3
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Eurostat. Link: https://ecipe.org/wp-content/uploads/2021/02/ECI_21_PolicyBrief_02_2021_LY02.pdf
European countries account for a large share of trade in COVID-19 related goods
Share of global exports/imports of COVID-19 related goods, 2018
20%
Share in global exports
Share in global imports
16%
12%
8%
4%
0%
US
Germany
Netherlands
China
Belgium
UK
Italy
France
Japan
Switzerland
Spain
Canada
Singapore
India
Poland
Source: OECD. Link: https://www.oecd.org/coronavirus/policy-responses/trade-interdependencies-in-covid-19-goods-79aaa1d6/
11ERT Trade Report 2021
What this experience underlines is the Supportive policies are, however, needed
importance of individual companies being to help companies build and maintain
free to decide on their own supply chain resilient supply chains. Industry has strong
architecture. Managing global value chains is incentives to internalise and manage risks to
complex, as supply chain needs vary by industry supply chains. But these firm-level strategies
and by product. The average tier 1 company has must be matched by an enabling trade
more than 5,000 suppliers globally.7 Industry policy. In practice, this means creating a
is best placed to decide which strategies will level playing field for competition at home
be most effective at reducing dependencies and abroad, with EU innovation protected
and building the resilience of specific supply by world-class IP regimes, and by allowing
chains. Getting it right is important not only companies to restructure supply chains as
for resilience, but also for competitiveness.
Box 1: Open strategic autonomy and supply chains
The European Commission observes in its trade policy Critical goods
review that “open strategic autonomy” is about “the
EU’s ability to make its own choices and shape the ERT recognises that policymakers have a
world around it through leadership and engagement, responsibility to work with industry to ensure
reflecting its strategic interests and values”. the supply of critical goods. In this context, we
define critical goods to mean those for which
The concept combines two European policy supply disruptions could potentially undermine
imperatives. The first is the principle of being the ability of policymakers to meet core public
open to trade, investment, the exchange of ideas, policy objectives and which would, consequently,
and the movement of people, while working materially impact on the lives of European citizens.
together with international partners for our mutual
benefit. The other is the recognition that in certain ERT believes the focus should be on core objectives
circumstances, dependencies can potentially create rather than core interests, as this provides a
strategic vulnerabilities that must be managed more specific and tighter test before a policy
in the public interest. The aim is an EU that can intervention potentially becomes justified.
act in the world rather than being acted upon. These core policy objectives include areas such as
The concept of open strategic autonomy is broad national security, public health, and fair competition.
and has been described by the Commission as a Certain components like semi-conductors or
“mind-set for decision makers”. However, if it is to technologies are essential for national security.
have a positive impact on behaviours and outcomes, Life-saving medical products or elements in their
without the risk of unintended consequences, it supply chains, such as active pharmaceutical
must also be deployed with precision and in the ingredients, are essential for public health. And
circumstances where it matters most. It is especially some inputs like the rare metals required in battery
important that it does not lead to protectionism or manufacturing and the production of electric
inadvertently undermine European competitiveness. vehicles are essential for fair competition.
In this section, we propose how the concept should Critical goods may be final goods, intermediate goods,
be applied to the global supply chains of European or raw materials. If supply chains for critical goods are
firms. Importantly, the approach outlined below not resilient, there is a risk that policymakers will fail
should not preclude a facts-based, proportionate, to meet core public policy objectives, such as those
and targeted industrial policy, which addresses described above. Moreover, if these supply chains are
strategic dependencies and strengthens EU controlled by unfriendly or rival states, there is a risk
capacities in critical technologies and services. that European dependence on them will be exploited.
In these circumstance, open strategic autonomy
7 McKinsey, March 2021
https://www.mckinsey.com/industries/public-and-social-sector/our-insights/effectively-implementing-president-bidens-supply-chain-review
12Making Open Strategic Autonomy work – European Trade in a Geopolitical World
and when this is needed, free from redundant in how this is interpreted. The more recent
regulatory barriers and arbitrary tariff costs. industrial strategy update puts the emphasis
on strategic dependencies and how these
Open strategic autonomy in practice have the potential to impact on the EU’s core
The concept of open strategic autonomy interests, but does not provide clear definitions
requires clarity if it is to be operational. The either.8 ERT welcomes the EU’s efforts to address
focus of the European Commission’s trade strategic dependencies in areas such as health,
policy is on strengthening Europe’s position in security, or the digital economy. Ambiguity
the world through a strategic approach and it in the concept of open strategic autonomy
describes open strategic autonomy as a mind- creates uncertainty. It is important to avoid
set for policymakers, leaving scope for flexibility this for trade policy and for businesses that are
already operating in a complex environment.
must inevitably place additional responsibilities on Figure 7 provides a decision tree to guide
policymakers to collaborate with businesses to ensure policymakers. It illustrates how, in many or most
resilient supply chains for these critical goods. cases, openness to trade or investment and forging
partnerships with other countries will be important.
Putting open strategic autonomy into practice
Practical considerations
There are potentially several ways in which the
resilience of supply chains can be enhanced. In It is essential that the implementation of the
most cases little or no intervention will be required. policy of open strategic autonomy is pursued with
But in some circumstances a more concerted transparency, so that all stakeholders can be confident
effort will be needed. In some cases, efforts to that the focus is in the right areas and that the
improve resilience may have an immediate effect, appropriate criteria and approaches are being used. It
while in others it may take time. It is essential that is also essential that policy interventions are targeted,
the approach is carefully designed and calibrated proportionate, and based on a factual assessment,
to match the form and scale of the risk. as argued in the industrial strategy update. As part of
this, dialogue between the private and public sectors
The default setting for the policy of open is required and ERT welcomes the commitment by the
strategic autonomy should be openness. In Commission in the industrial strategy update to work
most circumstances, being open strengthens in close collaboration with the relevant stakeholders.
the resilience of supply chains, while bringing
considerable benefits to European consumers As noted above, in some circumstances there is a
and boosting the competitiveness of European risk that European dependence on supply chains for
companies, which is essential for jobs and for critical goods controlled by unfriendly or rival states.
growth of the European economy. The threshold In these circumstances, a bias towards actions that
for taking a different approach should be high and are likely to have a more immediate impact on the
only apply in carefully defined circumstances. resilience of supply chains may be warranted.
Moreover, there are potentially several ways to In those circumstances where the increasing domestic
strengthen the resilience of supply chains, ranging production is the right approach, it is essential
from finding substitutes, encouraging diversification, that policymakers provide incentives to encourage
forging strategic relationships with suppliers, investments that build this capacity, without resorting
stockpiling, or encouraging domestic production. to excessive regulations or an overly bureaucratic
The best approach – or combination of approaches approach that seeks to enforce onshoring.
– will depend on the specific circumstances.
8 European Commission Communication on “Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe’s recovery”,
May 2021 https://ec.europa.eu/info/sites/default/files/communication-new-industrial-strategy.pdf
13ERT Trade Report 2021
Decision tree on open strategic autonomy and the supply of critical goods
The default setting for open strategic autonomy should be openness.
Is this a critical
good without
which core public
policy objectives could
Yes No
be undermined and
European citizens’ lives
would be materially
impacted?
No
intervention
Is the supply
necessary in
chain characterised supply chains.
by concentration or
scarcity of supply (e.g. critical
goods are sourced from a
Yes No
single supplier or geographical
location) which makes it
vulnerable to production
disruption in times of
No
crisis?
intervention
necessary in
Are there supply chains.
potential
Yes substitutes No
available for the
critical goods?
Pursue a Could Europe
resilience strategy
feasibly foster
that emphasises the
diversification and a pillar of domestic
flexibility of value chains, production in this area?
potentially complemented Yes No
Specifically, does Europe
by building strategic have the right geographical,
relationships
environmental, and
(e.g. EU-Canada Strategic
Partnership on Raw economic conditions?
Materials).
Pursue a
resilience strategy that
encourages domestic
production. This could Pursue a resilience strategy
include introducing targeted that emphasises stockpiling
incentives to bolster domestic or maintaining a strategic
production and/or broader reserve of the critical good,
measures to improve the where this is feasible.
environment for domestic
production on a
sustainable basis.
14Making Open Strategic Autonomy work – European Trade in a Geopolitical World
A sharper and more operational definition Resilience and the Single Market
of open strategic autonomy is required if it
is to help guide trade policy. Box 1 proposes a Building resilience must start at home and
definition of critical goods and how the concept the unincumbered functioning of the Single
of open strategic autonomy should be applied Market is essential for value chain resilience.
to ensure their security of supply. We explain To support this, the EU should continue to
the rationale for this in more depth below. make progress in the standardisation and
ERT’s approach is consistent in many ways with harmonisation of rules in the Single Market.
the EU’s approach, as set out in the industrial Internal fragmentation and regulatory barriers
strategy update, while clarifying how the concept inhibit companies from sourcing flexibly in
should be defined and deployed in practice. the EU. ERT welcomes the commitment in
the industrial strategy update to present a
Open strategic autonomy should mean strategy on standardisation that will both
strengthening Europe’s position through bolster the Single Market and increase the
openness in all circumstances and strategic EU’s influence over global standards.
autonomy where necessary. Support for
an open and fair rules-based trading system The need for deeper integration in the Single
that creates a competitive level playing field Market is particularly strong in the energy
for EU firms at home and abroad must be the and digital sectors. It is crucial to ensure the
guiding principle that anchors EU trade policy. interoperability of supply chains. Even though
A reformed WTO and a stronger multilateral some barriers are less visible to policymakers
system are essential for this. The concept of open or not of immediate concern to public opinion,
strategic autonomy must not undermine global every obstacle to the freedom of movement of
trade and investment as this would weaken the people, goods, services, or capital constitutes
global value chains established by European a barrier to the flexibility that is required for
firms and damage European competitiveness. companies to act quickly during a crisis.
Foreign value added is essential for export competitiveness
Foreign value added as a % of gross exports in 2016 (most recent year data available)
30%
25%
20%
15%
10%
5%
0%
Korea
Netherlands
Poland
Switzerland
France
Italy
India
UK
EU-28
Japan
Russia
Spain
Canada
Germany
China
Turkey
Brazil
US
Source: OECD. Note: Foreign value added for the EU-28 is extra-EU only. Link: https://stats.oecd.org/OECDStat_Metadata/
ShowMetadata.ashx?Dataset=TIVA_2018_C1&Coords=%5bVAR%5d.%5bEXGR_FVA%5d&ShowOnWeb=true&Lang=en
15ERT Trade Report 2021
Continuing support for industrial alliances capabilities, such as the industrial alliances
and Important Projects of Common and IPCEIs, must therefore take a long-term
European Interest (IPCEIs) in the industrial vision of enhancing Europe’s competitiveness
strategy update are important. The industrial through targeted and sustainable strategies.
strategy has a role to play in boosting Europe’s
domestic capabilities, particularly when Resilience through diversification
sufficient resilience in supply chains for critical and partnerships
goods cannot be built through other means, The main guiding principles for building
as shown in Box 1. Industrial alliances on raw resilience of global supply chains should be
materials, batteries and hydrogen are good diversification and flexibility. The ability to
examples of this. The forthcoming alliances rely on an adequate number of geographically
on microelectronics and communication diversified supply partners strengthens
technologies, as well as industrial data, edge, and the resilience of supply chains. Globalised
cloud, are welcome. The IPCEI instrument also production enables economies to replace
has the potential to boost European innovation imports from one country with imports from
and competitiveness, and IPCEIs should build another if supply is disrupted during a crisis.
on industrial alliances where possible.9
To support diversification, the EU should
Resilience and competitiveness are two continue to foster strategic partnerships
sides of the same coin. Building resilience to create the widest possible range of
is not just about reducing Europe’s strategic options for European companies. This means
dependencies, but about fostering mutual strengthening existing ties with key trading
dependencies between trading partners. This partners. It also means strengthening or
can be a natural consequence of increasing building new ties with other countries to create
the competitiveness of European industries the widest possible range of supply options
in the long run. Initiatives to boost European across multiple geographies and jurisdictions.
Shortage of supplies is the biggest risk of disruption for companies led by Members of ERT over
the next six months
% of survey responses
Highly disruptive Mildly disruptive Not very disruptive
Shortage of supplies
(e.g. rare earth, chips) 40% 20% 40%
Tight transport
capacity 32% 25% 43%
Trade tensions 32% 28% 40%
COVID-19-related
demand restrictions 27% 31% 42%
Transport costs 23% 21% 56%
Cybersecurity 19% 47% 34%
Currency volatility 13% 45% 42%
Energy costs 10% 40% 50%
Brexit 9% 19% 72%
Weak cashflow 4% 8% 88%
0% 20% 40% 60% 80% 100%
Source: The Conference Board & ERT. Note: Response to the question “To what extent do you expect any of the following issues
to be disruptive to your business over the next 6 months?” Responses grouped as follows: “Not very disruptive” if an issue was
rated ‘1’ or ‘2’, “Mildly disruptive” if respondents picked ‘3’, and “Highly disruptive” if rated ‘4’ or ‘5’. Survey published in May 2021.
9 For more information on ERT’s views on industrial policy and digital policy, see ERT Papers on “Turning Global Challenges into Opportunities”,
December 2019 https://ert.eu/documents/turning-global-challenges-into-opportunities/ and “Mapping a New World with the EU Digital
Compass”, May 2021 https://ert.eu/documents/digitalcompass/
16Making Open Strategic Autonomy work – European Trade in a Geopolitical World
Strategic partnerships can be pursued The limits of reshoring
through formal treaties or by more informal
means. Treaty-based structures include free Open strategic autonomy must not
trade agreements and bilateral investment undermine the global value chain model
treaties, which should continue to promote or lead to enforced reshoring. While the
European values and high standards in areas importance of diversity and openness are
such as the environment and labour rights. More acknowledged in the trade policy review and
informal channels include regulatory dialogues the industrial strategy update, the review
that makes it easier to access markets and to of strategic dependencies should not lead
diversify suppliers. The EU is improving its ability to either reshoring or nearshoring playing
to track non-tariff barriers faced by EU exporters an excessive role in building resilience.11
and the Commission’s Access2Markets database
Reshoring or nearshoring could lead to
should be used to inform the EU’s priorities for
the geographical concentration of supply
its economic diplomacy with key partners.10
chains and there is little evidence that this
Improvements in the breadth and quality makes countries more resilient. In fact,
of relationships should also be pursued at studies show that this increases the likelihood
a multilateral level, including at the WTO. of a bigger economic contraction during a
The EU should champion initiatives such as crisis, by replacing reliance on imports with
international protocols to avoid beggar-thy- dependence on a smaller range of domestic
neighbour policies in times of crisis, including producers.12 For these reasons, enforced
export bans. The EU should avoid such policies reshoring and nearshoring should play a limited
itself as it undermines trust in the EU as a trading role and only in exceptional circumstances.
partner and could limit Europe’s ability to foster
long-term, constructive strategic relationships.
Most companies led by Members of ERT are reorganising their supply chains, either temporarily
or permanently
Have you changed your company’s supply chain due to the pandemic?
No, we are not making any
18% changes to our supplier base
Yes, we are making/have made
37% temporary changes to our supplier base
Yes, we are making/have made
permanent changes to our supplier base
20%
Yes, we are making/have made
temporary and permanent
changes to our supplier base
25%
Source: The Conference Board & ERT. Note: Survey published in May 2021.
10 See https://trade.ec.europa.eu/access-to-markets/en/content/welcome-access2markets-market-access-database-users
11 See https://ec.europa.eu/info/sites/default/files/strategic-dependencies-capacities.pdf
12 NBER Working Paper on “Global Supply Chains in the Pandemic”, May 2020 https://www.nber.org/system/files/working_papers/w27224/w27224.pdf
17ERT Trade Report 2021
Organic reshoring of production and jobs is new production facilities and maintaining
often a natural, market-driven consequence open and secure supply chains.13
of Europe being an attractive location and
government policies can be supportive of Europe should continue to foster strong
this. The emphasis should be on using the enabling environments for innovation, which
full range of policy tools, including industrial help technology transfer and incentivise
policy, to build capabilities and capacity in investments in new technologies. IP rights
certain industries, such as the digital sector. allow companies to share knowledge and
Rather than being protectionist, trade policy technologies without fear of competitors
should help foster an innovation-friendly using this to their disadvantage. In regard to
environment through guaranteeing a level vaccines, IP protection has encouraged over
playing field, tackling unfair competition, 200 technology transfer deals that involve
and protecting intellectual property rights. companies sharing know-how of processes
and technologies.14 The issue extends beyond
The importance of innovation vaccines and applies to all areas of European
innovation. We do not know what the
Strong intellectual property (IP) frameworks next crisis will look like – but we can be
protect and incentivise European innovation sure that innovation will be needed to
and support resilience. Innovative commercial overcome future challenges and allow
ventures often involve taking risks and significant supply chains to adapt fast and flexibly.
up-front investment. IP rights allow industry
to recoup these investments and to continue The role of transparency
investing in research and development. The
incentives created by IP rights contributed Transparency can help businesses and
to the exceptionally rapid development of governments to identify and manage supply
vaccines and form the bedrock of a pro- chain risks and thereby build trust and
innovation environment that enhances European public support for global supply chains. More
competitiveness. They also increase the capacity transparency may be needed, but this must be
of European companies to adapt to new done in a way that is flexible and which does not
challenges during a crisis, providing certainty inhibit companies from adapting their supply
that successful innovation will be rewarded. chains to changing commercial circumstances.
It should be proportionate and avoid being
The IP waiver proposed by some countries for prescriptive, to avoid imposing unnecessary
COVID-19 vaccines threatens to undermine costs on business. It must also recognise and
European innovation and the resilience respect commercial sensitivities regarding the
of supply chains. Waiving IP protection for disclosure of confidential supplier information.
vaccines would not solve the current challenge
of scaling up manufacturing to meet global The proposed supply chain due diligence
demand. Moreover, it could discourage legislation (see Box 2) is expected to increase
innovation by undermining incentives to transparency requirements for human
continue research into new variants, diagnostics, rights and environmental standards. Supply
and future vaccines. The EU should continue to chains that comply with human rights and
advance alternative solutions, such as investment environmental standards are less vulnerable
in manufacturing facilities and capacity to some risks, such as accidents or labour
building, especially in developing countries. In stoppages. While compliance may enhance
this regard, ERT welcomes the establishment resilience, corporate reporting requirements
of the joint EU-US COVID Manufacturing and should be designed in a way that is manageable
Supply Chain Taskforce which will identify for all companies and does not stop supply
and resolve issues around expanding vaccine chains adapting swiftly during a crisis.
production capacity, including by building
13 See https://www.consilium.europa.eu/media/50443/eu-us-summit-joint-statement-15-june-final-final.pdf
14 IFPMA, April 2021 https://www.ifpma.org/resource-centre/covid-19-vaccine-industry-cautions-immediate-action-needed-to-remove-
manufacturing-supply-barriers-to-meet-production-targets-and-keep-on-course-to-equitable-and-fair-access-to-covid-19-vaccines/
18Making Open Strategic Autonomy work – European Trade in a Geopolitical World
The importance of services
Strategies for building global supply chain A high level of digitalisation across business
resilience should include supporting and operations may expose some supply
strengthening critical services. Global value chains to cybersecurity risks. It is important
chains depend on services – from internet that policymaking recognises the role that
connectivity and telecommunications to digital infrastructure and services play in the
logistics and supply chain management – to smooth functioning of supply chains. The risk
facilitate trade in goods. A trade policy that of disruption should be mitigated through a
supports trade in services and digital trade can range of policy actions, centred on efforts to
strengthen the resilience of global value chains build a harmonised European framework for
by improving production processes and logistics. cybersecurity and to foster closer regulatory
cooperation with partners such as the US.
Box 2: Corporate due diligence
The concept of mandatory value chain due be designed in a way that is manageable for
diligence has been gaining traction in the EU all companies, including SMEs, and does not
under the Commission’s sustainable corporate inhibit companies from adapting their value
governance initiative.14 ERT welcomes the chains to changing commercial circumstances.
Commission’s commitment to propose
The EU’s due diligence legislation should be
mandatory due diligence legislation that
aligned with the international standard of
includes within its scope human rights and
the UNGPs and the UN and ILO conventions
the environment in relation to value chains.
and the OECD Due Diligence Guidance for
The creation of a harmonised legal framework Responsible Business Conduct. Companies
across the EU should reduce legal uncertainty should demonstrate that they are taking
for businesses, create a level playing field, and reasonable steps to prevent and address human
provide more leverage with business partners rights and environmental impacts across their
to deliver on human rights and environmental value chains. This should include the provision
commitments throughout the value chain. It of a ‘safe harbour’ for businesses to disclose
should encourage greater transparency and the issues and risks they face along their value
underpin a longer-term change in corporate chain and to take action to mitigate and address
culture, which will help increase public support them on the ground. Due diligence legislation
for international trade and globalisation. should not inadvertently lead to situations where
Many companies already demonstrate strong companies are held liable because they have
leadership in advancing the Sustainable taken meaningful due diligence measures.
Development Goals and are committed to
Finally, constructive engagement with
adhering to global standards in this field.
and support to the authorities of third
Mandatory due diligence requirements must countries where harms occur is important,
be carefully designed to avoid constraining in order to ensure other states fully
value chain agility during a crisis. Resilient respect their ‘duty to protect’ by effectively
value chains are flexible and agile, and onerous implementing and enforcing relevant
reporting requirements could undermine this. international laws and standards.
Due diligence frameworks should therefore
15 See https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance
19ERT Trade Report 2021
Extraterritorial measures
The EU should develop a strategy to mitigate sometimes by the EU itself – can undermine
the impact of extraterritorial measures, such supply chains. While sanctions can disrupt
as sanctions or regulations, on the global supply routes, extraterritorial regulation can
value chains of European firms. Extraterritorial also add complexity for firms by requiring
measures – both imposed by third countries and them to comply with two sets of national and
Main Recommendations on Global value chains
1. The EU should establish a clearly defined, the US, Canada, the UK, Japan, India, Mercosur,
high threshold for introducing strategies that Africa, Australia, and New Zealand. The EU’s
emphasise autonomy over openness and economic and regulatory diplomacy should seek
diversification with regard to critical goods to avoid duplicative regulatory requirements or
(see Box 1). Businesses are best able to manage product standard certification, and to minimise
their own supply chains. Targeted interventions to regulatory frictions of all kinds that are faced
support the resilience of supply chains for critical by companies when switching suppliers. The
goods should be the exception, not the rule. Where focus should extend to services as well as goods.
stockpiling is necessary, there should a fair sharing Greater harmonisation, equivalence, or mutual
of the costs so that the burden is not passed to end recognition in critical industries could have a
users. In circumstances where a greater capacity to material impact in improving supply chain flexibility.
produce in Europe is necessary, incentives should
4. The EU should seek to reduce to zero tariffs for
be provided to encourage this, and companies
critical goods on a most favoured nation basis.
should not be coerced into onshoring production.
One of the consequences of preferential trade
Such targeted strategies should only be used if
agreements is incentivising the organisation of
resilience cannot be achieved through other means.
supply lines along margins of preferences that make
2. Resilience must begin at home and so the EU switching to suppliers outside the free trade zone
should further strengthen the Single Market to artificially expensive. Sector-specific multilateral
support diversification and flexibility in supply or plurilateral agreements under the WTO that
chains. This means removing regulatory frictions liberalise tariffs on critical goods would therefore
that restrict intra-EU trade and make it harder ensure that companies are not penalised by higher
to source flexibly. The EU should reinvigorate the tariffs when they switch suppliers during a crisis.
Single Market standardisation process in close
5. The EU should support innovation through
cooperation with industry and standardisation
stronger protection of intellectual property in
bodies. Standardisation forms the cornerstone of
the EU and in foreign markets. The incentives
an innovative and dynamic European Single Market
created by IP rights have contributed to the
and provides a basis to improve the interoperability
exceptionally rapid development of vaccines and
of international markets and supply chains. Digital
form the bedrock of a pro-innovation environment
standards are a priority as they are essential for
that enhances European competitiveness. Waiving
the digital transition and will help to strengthen
IP rules for vaccines would send the wrong signal
the global value chains of European firms by
to innovators and risks setting a dangerous
improving production processes and logistics.
precedent in this and other sectors. Strengthening
3. The EU should invest further in developing and enforcing IP regimes in third markets would
strategic trade and investment relationships support other industrial policy objectives and
with key partners. This will help European help to foster mutual dependencies that underpin
companies to build resilience through the stability of the global trading system.
diversification. Priorities include, among others,
20Making Open Strategic Autonomy work – European Trade in a Geopolitical World
extraterritorial regulations. To mitigate the in line with international law. The Commission
impacts of sanctions on supply chain resilience, should also ensure European companies are
the EU should develop proposals for an anti- properly consulted about the introduction of any
coercion mechanism, which is intended to avoid new extraterritorial regulations, with sufficient
undue pressure being put on European entities, time to adjust supply chains where necessary.
6. The EU should adopt a more agile procurement of the WTO must include re-establishing the
process in times of crisis to allow supply to dispute settlement system, modernising WTO
respond quickly to changes in demand or rules, and facilitating plurilateral negotiations,
disruptions to supply. To a large extent, the such as updating the WTO pharmaceutical
supply challenges during the pandemic stemmed agreement, expanding global participation in the
from a lack of coordination between EU national information technology agreement, finalising
authorities and lengthy standard certification the WTO e-commerce negotiations, and reviving
processes. The EU should implement a more negotiations on trade in environmental goods.
strategic public procurement framework based
9. Businesses should be transparent about
on the Most Economically Advantageous Tender
their supply chain risks. This helps connected
(MEAT) concept to avoid tenders being awarded
businesses to manage their own risks and so to
based on the lowest price alone. Other factors to
reduce systemic risks. Transparency is preferable to
consider are whether goods are procured from
more bureaucratic approaches, which could do more
jurisdictions with high regulatory standards, to
harm than good by reducing the efficiency of supply
ensure that rapid procurement does not pose
chains or by making it harder to adapt them quickly.
risks for consumers or distort competition.
Industry groups should consider how they could
7. The EU should work with the G7 and G20 to help firms to identify and follow best practice for
improve the coordination of national responses transparency in supply chain risks, while recognising
to future crises – including pandemics – and that the approach will need to be tailored to different
avoid self-defeating protectionism. The pandemic sectors and the circumstances of individual firms.
illustrated that protectionism can undermine
10. The EU should avoid or take steps to counter
resilience. The G7 and G20 summits present
the impact of extraterritorial measures on the
an opportunity to agree new frameworks for
value chains of European firms. Extraterritorial
international cooperation including, for example,
measures, both imposed by third countries and
WHO-led efforts for a new international pandemic
by the EU itself, can undermine value chains and
prevention treaty and a new WTO trade and
be a source of disruption to international trade.
health initiative. These efforts should produce
The envisaged anti-coercion legislation under
clearer and tighter protocols for introducing trade
the EU’s enforcement regulation could help to
restrictions and common principles for procuring
protect European companies from extraterritorial
critical goods during a global emergency.
measures by other countries. With regards
8. The EU should seek to strengthen the rules- to the EU’s own extraterritoriality, European
based multilateral trading system through companies should be properly consulted about
WTO reform, as this allows businesses to proposed new measures with sufficient time to
diversify their supply chains across the widest adjust their supply chains where necessary.
possible range of countries. The WTO is the
backbone of the global trading system and a
guarantor for stability in trade relations. Reform
21New opportunities from the Transatlantic alliance The EU and the US acting together can build a stronger transatlantic economy, shape standards globally, and strengthen multilateral institutions and the global rules-based system. There is a close alignment between EU and US values and interests in many aspects of trade policy and in related areas, creating a strong potential for bilateral cooperation. The EU and US should resolve bilateral disputes, such as Boeing-Airbus and the additional tariffs imposed on steel and aluminium, while forging a positive agenda for collaboration. The trade dimension to COP26 provides an immediate opportunity, where the priority should be to encourage the wider adoption of carbon pricing and a common approach to carbon leakage. Some of the most promising areas for collaboration are in new technologies, both to build transatlantic capabilities and to set standards globally. The EU and US should seek to build a common transatlantic digital economy. In this and other areas the EU and US should enter dialogue with business – including ERT and the US Business Roundtable (BRT) – on priorities.
ERT Trade Report 2021
Creating a Transatlantic digital economy
The EU and US should aim to build a common large tech companies, and encourage EU-US
transatlantic digital economy, starting with cooperation on AI governance, data governance
closer cooperation on digital governance, and protecting critical technologies.
regulation, and standard setting. The intensity
Despite the positive intent, there are
and scope of regulation of digital technologies
diverging views on competition, content
and activities such as artificial intelligence
regulation, and AI and data governance that
(AI) and data sharing have increased. Without
need to be resolved. While both EU and US
closer collaboration there is risk of further
policymakers are increasingly concerned about
regulatory fragmentation, which would impose
the market power of large technology firms,
unnecessary costs on businesses. Closer
views on how to address this diverge across
integration of the transatlantic digital economy
the Atlantic. Whereas in the US competition
would drive trade and innovation. Moreover,
authorities are prioritising ex-post antitrust
the EU and US should use their combined
enforcement against individual companies,
influence in this area to set standards globally,
in the EU policymakers have moved to more
based on transparency and shared values.
prescriptive and all-encompassing ex-ante
The new Trade and Technology Council rules for gatekeepers. US policymakers appear
(TTC) that is being established by the disinclined to follow the EU’s approach of
EU and US provides an opportunity to developing binding obligations on content
strengthen collaboration in this area.16 The regulation for platforms. The US lacks a federal
TTC and its working groups should seek to framework for data protection and has so
facilitate trade and develop shared standards, far demonstrated a preference for voluntary
establish a transatlantic dialogue on the rather than binding rules to govern AI use.
responsibility of online platforms and other
The EU and US digital marketplaces are large but have room to grow
E-commerce sales, USD trillion, 2018
10
% of GDP
42 B2C
B2B
8
6
4 66
17 22
2 84
32
0
US Japan China EU-4 Korea UK
Source: Hamilton and Quinlan (2021), drawing on UNCTAD data. Note: EU-4 includes Germany, France, Italy and Spain.
Link: http://www.wilsoncenter.org/sites/default/files/media/uploads/documents/TransatlanticEconomy2021_FullReportHR.pdf
16 See https://www.consilium.europa.eu/media/50443/eu-us-summit-joint-statement-15-june-final-final.pdf
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